Question 120: Companies A, B and C are in an Affiliated Service Group. Company A currently has 100 employees and a 401(k) plan that covers only employees of Company A. Company C has 2 employees and a SIMPLE IRA plan that does not cover the employees of Company A. Is the SIMPLE IRA plan in trouble for not covering the employees of Company A? (Company A does not desire to participate in the SIMPLE Plan.) This ASG has been in existince for about a year.
Answer: Yes, the SIMPLE is in trouble, or shortly will be.

IRC 414(m) says that for purposes of 408(p) (the SIMPLE provisions) and various other Code sections all employees of any member of an ASG are treated as being employed by a single employer. Now let's look at the requirements for a SIMPLE in that light.

IRC 408(p)(2)(A) provides that SIMPLEs can be maintained only by eligible employers. IRC 408(p)(2)(C)(i)(I) provides that an eligible employer is one with no more than 100 employees making $5,000/year during the prior year. The employees of A and B must be included in making that determination.

IRC 408(p)(2)(D) provides that the SIMPLE must be the only plan of the adopting employer. Company A's sponsorship of a 401(k) plan violates that requirement.

IRC 408(p)(4) says that a SIMPLE must cover all employees of the employer who meet the compensation requirements in the current and either of the last two years, other than those listed in the statutory exclusions of IRC 410(b)(3). Company C's SIMPLE does not do so because it does not cover the employees of A and B, many of whom would meet the compensation requirements and would not be excluded under one of the 410(b)(3) statutory exclusions.

So, that makes three separate provisions of the SIMPLE rules C is violating. Not so "simple," eh?

IRC 408(p)(10) helps us somewhat. It provides that if the SIMPLE was in existence before the ASG was formed and satisfies all the applicable 408(p) requirements before the ASG was formed, then it will be considered to meet those requirements for the remainder of the calendar year in which the change took place, plus all of the following year.

Does that solve your problem? No, not if C has been part of an ASG since its formation (because the SIMPLE never would have satisfied the 408(p) requirements). Nor would it solve your problem if the SIMPLE's plan document requires coverage of all qualifying employees of the employer or of an entity aggregated with the employer. Check the document and you will likely find such a clause. That would mean that the employees of A and B would be eligible to participate, whether or not the law requires them to be covered.

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